Is the housing market actually in trouble? All the clickbait articles and doomsayers would have you believe so, but the facts are very different.
In this episode, Toby Mathis of Anderson Business Advisors welcomes Neal Bawa back to the show. Neal is the founder and CEO of Grocapitus, a commercial real estate investment company, and CEO of MultifamilyU, an apartment investing education company. He’s known as the Mad Scientist of Multifamily and uses the power of numbers to acquire properties and create profit for investors.
Neal walks us through the facts and data surrounding our economy right now, and looks at historical trends to predict that by mid to late 2023, we will probably be looking at much better interest rates than we’re seeing currently. People may not realize that in the global economy, the U.S. is still one of the cheapest real estate markets, relative to individual salaries, and Neal explains that we’re actually lucky that we have a Fed that can help correct our markets when they begin to spiral out of control.
Highlights/Topics:
- Fed rates: look at nine past recessions to see how the market corrects
- Freight costs: watch container costs from China to predict global demand
- S. economy: we are the strongest in the world, other countries are much worse off than we are currently
- Clickbait: ignore the noise and alarmist articles you see on social media, look for the data and facts
- Unemployment and housing demand: demand will return to normal, but prices will remain high
- Retail and Travel: performing/demand is better than ever
- Europe’s housing market: the majority of properties are owned by investors
- Looking at historical data: the 2007/08 bubble is the only anomaly of the last 100 years!
- Liquidity: get yours in line now while it’s cheap
- The U.S. real estate market: compared to India, China, Europe, it’s the cheapest in the world relative to individual salaries
Resources:
Listen to Neal’s previous appearance
Full Episode Transcript:
Toby: Hey, guys. It’s Toby Mathis with the Anderson Business Advisors podcast. Today I have with me Neal Bawa. Neal has been on a bunch of times, and I’ve known Neal for years. Hey, Neal, how are you doing?
Neal: Fantastic. Thanks for having me back on the podcast.
Toby: Oh, this is going to be a fun one because facts don’t care about your feelings is going to be the model for today because we’re talking about the future, the real estate market, and your predictions. I love having you on because we had you on during the pandemic. It was a blast, and we got to get our crystal balls out. Now, I’m curious as to what you’re thinking about where we’re headed.
Neal: Well, first things first. We think that the chances of a recession now are in that 100% range. So we’ve gone back, closed down 99.99%. Because we went back and looked at the Fed’s track record. In the last 61 years, the Fed has raised interest rates nine times to kill inflation. Their track record of killing inflation is awesome. All nine times, the Fed succeeded.
Their track record of avoiding a recession while killing inflation is awful. They managed to do it once in 1986. That’s it. Every other time, the Fed basically should stop saying we’re raising interest rates. What the Fed should say is, we are putting the economy into a recession to avoid hyperinflation. If the Fed was honest, that’s what they would say, but we’re going to put it into a shallow recession.
We also studied, what were those recessions to avoid inflation. What were those recessions and how bad were they? The short answer is every single one of those recessions that was created just because inflation was getting out of control was a shallow recession. None of them lasted longer than nine months, none of them felt like 2008, and none of them left any lasting damage to the economy. I’ll explain what that means.
Let’s say you have this line, your trendline. When the recession starts, you go off of that trendline. If within a year and a half you come back to the original trendline, that’s considered a non-damaging recession. It basically brought you back to the original trendline. You just had this dip, and you needed that dip to not get into hyperinflation.
But if you came back to the original trendline, that was a non-damaging recession. Well, luckily, all of these that the Fed puts us into are non-damaging. Our team, actually, a group of four people looking at this stuff. We were looking at the FRED, which is the St. Louis Federal Reserve website. When we looked at it, it was obvious why these are non-damaging. Because in every instance the Fed put us into the recession, and it was also very clear that the Fed took us out. The Fed is the one that actually removes us from a recession by then dropping interest rates very quickly.
Toby: Do you think that’s what they’re doing when Powell says, we’re going to raise interest rates to the end of 2022, and then start to taper it back down in 2023? Do you think that he’s basically saying, hey, that’s what we’re going to do? We’re pushing you off the path. Let’s say you’re running down a path and we’re worried that you’re getting out ahead of yourself, and maybe that you’re going to go too fast. You’re going to fly off the path.
So we push you off the path instead, just a few steps so you fall into the bushes. Then you get back on the path again, you keep running here, and we’re going to shove you off the path for a little while. You’re running too fast.
Neal: You’re running too fast. Then when you come back, you’ll be a little more cautious and you’ll walk instead of running. But you notice that the Fed never really talks about tapering downward. The reason for that is they’re afraid that the market will simply then assume that five months from now they’re going to be tapering, and then the market doesn’t slow down. You don’t ever get to a recession.
So the Fed statements currently do not refer to the other side of this. But our research suggests that every time the Fed does it, it’s mountain shaped. It’s sharp up. The peak is very, very shallow—usually three months—and then it’s sharp down. And the sharper they go up, the sharper they come down. That’s their track record.
Toby: Now, what do you think though? Because in 1986, we didn’t have a pandemic right before it. We didn’t have $5 trillion dumped into the economy during that period of time of new money, just like the Fed dumping money into it. What impact—and I’m sorry if this is unfair because I’m throwing this stuff at you.
Neal: I think it’s a good question.
Toby: But what impact do you think that’s going to have?
Neal: So it simply means the Fed needs several more raises to get to where they would have gotten to without that $5.4 trillion, and the Fed is about to catch a break. This is not one that they would have anticipated catching.
A lot of people think, where does Neal look for his data? I’m crazy. One of the sites that I found that actually has incredible data that appears to suggest trends that nobody knows about is a website called FBX. That’s fbx.freightos.com, or you can just try and go to freightos.com and sign up for an account.
Toby: I can see it right now.
Neal: This is an amazing website because it shares data on the cost of shipping containers from China to the United States. Actually, it does it from everywhere to everywhere. But the only number that I always look at—and I track it and I take screenshots—is the number from China to both the East Coast of the United States and the West Coast of the United States. Because what I find is this data shows me upcoming prices three or four months from now.
I can share this data with you. This is brand new data. In July, the website, when I look at the data—I’m looking at right now for the US—the high on a shipping container was $27,000 on July 22. So this is just barely a month ago, $27,000 a container. You’ll be stunned, Toby, at what it is today. The high today is $8,700. Yeah, it’s gone from $27,000 to $8,007 in 37 days, so I know what is about to come.
I know demand is cratering worldwide. When demand craters worldwide, it tends to have a lowering price on oil. Basically drops the price of oil. Obviously, oil is the largest factor of inflation worldwide. I think we’re about to see that. Because when transportation costs go down, it’s not just the cost of transportation going down. It’s demand. Fundamental demand is cratering. I think the Fed is going to catch a break over the next three or four months.
Toby: We’re lucky for that, right? That’ll keep them maybe from going too nuts, or maybe they’ve already factored this in, Neal.
Neal: Obviously, the Fed looks at this data, and they look at data much more than I’m capable of looking at. But there are trends here that I think are invisible to the rest of the market because they’re only five or six weeks old and they’re extraordinary. Here’s a headline that I am predicting seven or eight weeks from today. World economic demand craters. That’s what I’m seeing. That’s what I’m seeing right now on the Freightos website because I’ve not seen anything like it.
I think that helps the Fed. But that doesn’t mean that they’re not going to raise by 0.75% in the next meeting. They lose credibility if all of a sudden they back off. So they’ve got to keep going a little bit longer.
Toby: But when you say demand—you and I are in the same circles—there’s a massive demand for housing. There’s a massive demand for food—not going away. Massive demand for maybe things like consumers.
Neal: Yeah, look at everything that the US consumer uses. Obviously, food and housing are two key inputs of that. But oil is a big one and oil demand is expected to reduce. Well, it’s down from $130 a barrel to $90 and still dropping. There are many others. We can’t simply just look at our side of the world and say that’s all the demand there is because it’s simply one input in a much bigger picture.
If all of the other inputs are showing negative growth, and at this point they are, then I think that you can continue to have strong demand on the housing side. The Fed isn’t feeling as pressured to clamp down on housing anymore. What the Fed is doing—people have said this—the Fed is not trying to cool the economy. They’re trying to cool housing because it’s the portion of the economy that was the most fragile.
Toby: I think the wages have a lot—
Neal: Wages now, for sure.
Toby: Employment market. Everybody’s running around jumping ship to different jobs because everybody’s in a bidding war for people. I live in Las Vegas where restaurants are closed two days a week, in some instances, because they have a lack of personnel. They just can’t find people to fill the positions. They’re trying to create some new job openings. Let’s just put it that way.
I’ll put it nicely. They’re trying to like, let’s have a little higher unemployment maybe to cool that down. What is that going to do to real estate? You and I are both real estate investors. For all those folks that are like, hey, I really love investing. I’ve just had this huge 48-month run-up or 24-month run-up that we’ve never seen before. What are you going to do? What do you think?
Neal: I’m going to ignore this Freightos data for a moment because that’s brand new, and I don’t know exactly how much impact it will have. So assuming that the Fed doesn’t catch that break, the Fed has to look at unemployment. It’s ridiculously low, and the economy is currently fighting the Fed. It’s fighting the Fed and it’s fighting really, really hard. I saw last month’s job numbers. They were out of this world.
At any point in any economic cycle, you’d love to have numbers like this. Having numbers like this with interest rates this high is just absolutely astonishing. The strength of the US economy is amazing. Absolutely amazing. By the way, there are a lot of people who think that somehow the grass is greener on the other side of the Atlantic. It’s horrible.
England’s recession is so bad that the last time they had a recession this bad was in the 1700s. A hundred years ago, they had a recession that’s bad. All of the Eurozone is in a recession. Japan’s in a recession. China’s going into a recession. There’s one strong economy in the world right now and that happens to be the USA. So feel a little grateful about where you are, people.
Toby: When I was just over in Europe last month, it’s bonkers. But what was really bonkers was the energy prices pulling up multiples, like people saying—
Neal: 4x, 5x, 6x.
Toby: Yeah. It’s bonkers how much it’s just gotten nutty. I don’t see that here, hopefully.
Neal: We are an extraordinarily insulated and lucky economy when you compare us to the rest of the world. The bottom line is the rest of the world is weak. That’s going to give Fed some room there. But our economy is not helping the Fed any. So here’s what’s likely to happen. The Fed keeps raising rates, maybe 0.75 in the next meeting, and then again in November, and the housing slows down.
We were already seeing the housing data slowdown. I think that we are going to be in a housing correction, but not a housing recession. So what I’m seeing right now is some of the strongest markets in the US are beginning to correct. Austin, Phoenix, and Reno are correcting. Vancouver on the Canadian side has already started its correction process.
I’m seeing prices fall in Tampa, Boise, and a couple other markets, some of the kind of bubbliest markets if you want to call them that. But other markets are still going up. Dallas was very, very strong last month. Houston was very strong last month. Overall, the housing market went up in the last 30 days. It went upwards, prices went up, and some markets went a little bit down.
Toby: People keep saying it’s crashing. And I’m like—
Neal: That’s the problem, Toby. Every article I see is clickbait because they say 30% reduction. It’s a 30% reduction in the number of properties being sold. And 30% seems like a lot because it panics people, 30%, 40%. Yes, but why don’t you compare it to previous years? We’ve got a weird time to compare because of COVID. We’ve got all these benchmarks. These numbers don’t work.
But then you go and read like five pages later at the bottom of the article it says, but home prices increased by 1.2% in the last month. Why didn’t you say that in the first paragraph?
Toby: Because it’s not up as fast as it was growing. It’s cut in half.
Neal: Exactly.
Toby: I love that. I look at it like, okay, you took a jetliner and you went up to 40,000 feet. Now it’s at 35,000 feet.
Neal: But they’re usually at 35,000, right?
Toby: Normally it’s at 30,000 feet. We’re still way up. We’re not nosediving unless somebody decides to push the plane out of the sky, maybe then we’d have an issue. That’s kind of what the Fed is doing. They’re like, we want you to go down, but we don’t want to crash you.
Neal: Yes. I actually write down all of the numbers from all of the different agencies. Ivy Zelman is a kind of famous well-known consultant. She thinks about -7%, so it might go down 7% nationwide with some markets going down 10%. But then there’s Fitch, Fannie Mae, and Freddie Mac all saying +2%. These are new numbers based on what’s happening today. It’s not six-month-old data.
Toby: Let’s talk about who this is really going to hurt. Fed’s doing its activity. We’re going to see unemployment go up. You’re going to see companies having to lay off. You’re going to see short term pain. You’re not building housing. However, the Joint Center for Housing says we’re behind. The last numbers I looked at was like 3 million and then I saw 3.8 million.
Neal: 3.8, 3.9 is the most common number.
Toby: That we’re short of housing. It’s low to moderate-income people that are getting kicked right in the teeth again. It’s disheartening, but as an investor, take note, the demand hasn’t gone away.
Neal: No. Absolutely.
Toby: It’s much cheap money., but the demand is there. It’s like people are hungry and you have food. Is there a demand to go to a French restaurant and spend $1000 on a meal? Maybe it’s $950, right? But everybody else still needs to eat regular food. I think that people still need regular real estate.
Neal: I like that analogy so I’ll take it a little bit further. What happens is when layoffs start and sentiment goes down, some of those people that were going to the French restaurant three times a month are now going twice a month. Some of those ones that are going to that $1000 French restaurant will go into a different one that’s $800.
The point though is when that recession ends—and remember shallow recessions. When the Fed creates artificial recessions, they’re shallow because the Fed ends the recession, just as they start them. When they end, people start to go back to that same $1000 French restaurant the same number of times a month. So housing and oil are the two most inflexible things in the world if you don’t count food. Obviously, food is inflexible. You need a total number of calories per day.
But beyond that, there are two areas that are extraordinarily inflexible: one’s housing and the other one’s oil or gas consumption. What we’ve seen as the norm is that whenever that recession ends, they return to normal, but they don’t return to normal. I’ll explain why. The demand returns to normal, but the price always returns to higher than normal. That’s the part that most people don’t understand.
The reason for that is builders. So already in the United States, if you look at home prices, home prices are up from last month. But builder sentiment is down. Stocks in the US are down 28% because the home builders pick up money from the public. They pick up money from Wall Street and Wall Street doesn’t want to give them money right now because they get affected the most because their prices are the highest. They’re at the top end of the market.
So what happens when recessions start and even before they start is a homebuilder that was building 10,000 homes is now building 7000. So they create this supply hole and it takes about 18 months for the hole to be created. Now, at the end of those 18 months, we were supposed to have a million new homes. Now, we have 700,000 new homes.
Whenever the prices return to normal and rents return to normal, they then grow faster. They spike up because you created the hole during the recession. If you read the articles, we’ve already started creating that hole. Perry Homes is saying we’re down 30%. Lennar is saying we may be down 40%.
Well, here’s the thing, at the end of the recession, we still have the same number of people or slightly more. The US does have population growth. Well, then we keep making these holes every time with the recession. So this 3.9 million number two years from now is going to be larger, not smaller.
Toby: I wish they would lead with that. I wish they would say we have a real density housing crisis, and we’re not building enough homes because home starts are down because interest rates are high, supply chain issues, and inflation. You just say that, boy, we need more housing.
Neal: I think a fair comment would be that once we get to the point where unemployment hits maybe 5–5.5%, that’s when the economy really starts to feel very negative. Because right now, people, if you check their sentiment, they say it’s negative. If you look at retail sales, they’re amazing. So their sentiment is stopping nobody from buying anything. Retail sales are fantastic. Travel is up by a shockingly high number. Every flight in the US is full. They’re begging pilots to pull triple shifts. United’s paying people 3x their salary.
Toby: There are not enough employees here.
Neal: They’ve canceled 27,000 flights this year already because they don’t have enough manpower. So sentiment or not, right now the American consumer is spending the money and it’s debatable whether they have the money to spend or not.
Toby: That’s what the Fed has its target on, right?
Neal: That’s exactly right. I mean, the Fed needs that to go down.
Toby: We got to push you guys off because you’re out of order.
Neal: Yes, exactly. You need to calm down a little bit and we’re going to help you calm down. And the key thing is what is going to happen in the next three or four months? The biggest thing for people listening to this podcast is this. Today, the economy is at 3.5% unemployment. There are 11 million jobs open. You’re like, but Neal and Toby are just looking at today. No, we’re not. We know that in five or six months, unemployment will be higher. The sentiment will be lower.
You’ll be thinking, oh, I’m glad I didn’t buy something. But answer this question, when this recession ends, and we have more people living in the United States and because of all this inflation, the cost of everything else has gone up, where will the homes come from if the builders stopped building them? And if they don’t build them, won’t people have to rent?
That’s really the fundamental question of supply and demand that no one ever really articulates for me, where are all these homes going to come from? That’s why I continue to invest. I’m just preparing for challenges coming up in the next 12 months. You’re in a recession or unemployment high, my delinquency is going to spike. I might have to give more concessions. I might have to stop increasing my rent. I’m prepared for all of that because my bounty is at the other end of this when another supply hole is dug.
Toby: Find me a 10-year stretch in any major market where it didn’t come back. Remove Detroit from the mix. For most major cities, barring some extraordinary change in the economy, just like normal markets, it’s almost impossible to find one. You’re looking at a major city that isn’t over a 10-year stretch up, even during our 2008 recession.
Neal: Yeah, and Toby, I want to add one last piece because this is new. There is no previous data for this, okay. If you go to Europe, like you, I spent my summer in Europe this year. I was in London. I was in France. I’m a real estate guy so I’m going around talking to people about real estate. They’re like, you guys are weird in the US. Do you know that most of our homes are owned by investors?
Rich people rent because even if they are owning, they go on somewhere else, but their home is rented. In the entire continent, a significant portion of everything is owned by investors. Now, in the US, please read the articles. They’re talking that says, by this date, by this year—I think it’s 2030—40% of all homes in the United States will be owned by investors. So the US is an aberration.
There is no developed economy where so many people own their homes. We are an aberration. That’s coming to an end because we ran out of cheap land. We haven’t really built a major freeway system in this country for 30 years. So obviously, you’re going to run out of cheap land. Where’s the $5 trillion that you need to build another freeway circling around every city in the US? The money isn’t there. We’re too nimby.
That kind of development simply is not happening anywhere in the US. If you can’t do that level of development, you run out of cheap land. Once you run out of cheap land, you become like Europe. And if you become like Europe, then at least half of your homes are owned by investors. At this point, investor interest in real estate is the highest it’s been in history.
Institutional interest, people who are buying $1 to $10 billion a year has really only existed for the last 10 years. So American homes for rent started that revolution in 2010—Blackstone, BlackRock—and now everybody and their mother has joined in. We are in this two-decade process of moving from an ownership-based model to a renter ship-based model. And there’s nothing anybody can really do to stop it.
Toby: Well, I keep reading about, I think it’s Blackstone. They’re saying that they’re going to stop buying in certain markets and they’re going to cool down. They’re kind of at the mercy of the Fed too, especially their investors. But at the same token, you see they’re slowing down in markets. You hear that they have $50 billion in funds that they’re raising to re-enter the market at the same time. When you start looking, you’re like, oh, yeah, we’re going to stop buying in most of these markets. Then why are you stockpiling all that cash to come back into the market?
Neal: Because they can actually affect the market. What we’ve seen is Blackstone and BlackRock, understand that unlike any of us, they can actually make enough statements enough number of times to actually cut a 5% discount. When you have $50 billion, 5% is $2.5 billion of profit by simply making a bunch of statements over and over again, and paying for press releases to make those statements. You can move a market. That’s what they’re doing. It was brilliant, right?
Toby: They used to do that in the stock market where they put in these big sell orders but they’d have an even bigger buy order waiting.
Neal: Right after that, yeah.
Toby: You could see the double like, yeah, hey, I could see those flow.
Neal: The funny thing is that is now illegal to do in the stock market. It is not illegal to do so in real estate. There is no SEC equivalent order preventing you from basically issuing statements and then going back and buying when the price is lower.
Toby: We’re leaving this market.
Neal: I see a lot of that up there.
Toby: What’s wrong with your eye? No, we’re leaving it.
Neal: Right, and everyone’s asking the same question. We know you have this $50 billion. Why don’t you issue a statement about what you intend to do with this $50 billion?
Toby: Because then you guys would all mark it up and make it more expensive for us.
Neal: Exactly.
Toby: They’re in it to make some dollars. We’re in it to make some dollars, and we’re a little more fleet of foot because we’re a lot smaller and we don’t have investors to answer to on that scale. You get to because you do syndications. Me, I’m just a Joe Schmo who likes to buy property. I’m like, that looks good. That one looks good. I’ll buy that one.
Neal: I think as long as we can ignore noise, noise is really the biggest problem in real estate. You read this article, and one of the most annoying things I’ve seen, if you’re using Facebook or Flipboard, once you click on an article, it will then supply you with three articles like that. So if you’re clicking on an article about the housing market crash, you can be sure that 15 minutes later, you will see another one. Now you think that every article is about the housing market crash.
Toby: In a crash, I’m going to dump all my stuff.
Neal: It’s ridiculous. I think that the way that we read news in this country is messed up. It’s best to actually prevent cookies. That way, you get all the news, rather than just the news that it thinks you should be getting, which is housing market crash, housing market crash. I think that’s the key portion of this.
Having said that though, there are sectors that have adjusted. I just bought a new property, a multifamily property. It was roughly $25 million, something like that, and I paid 18% less for this property than three equivalent sales—same age, same size—that were sold in the last year. So the average price was about $220 and I paid $190. I’m 18% lower because on the multifamily side, what happens is as soon as the market adjusts, the banks give you a lower loan.
They reduce the amount of lending because they say, well, your cash flow is reducing. So the multifamily market actually is more pragmatic and I like being there because it’s more data-driven. You don’t really have a choice. You can’t have a fake price. You can tell people, I’m going to sell my property to you for $233 a door. I’m sorry, I can’t finance the property anymore at $233 a door, so the price automatically adjusts.
Nobody’s talking about this. That hey, multifamily prices might be down by 10% or 15%. Because the multifamily guys know that this is a business. Now, you might say why would you want to buy these units today, knowing the interest rates are high. Because interest rates are transitory, but the purchase price is not. So I’m still getting that 18% discount, where 18 months from now I’m going to refinance this property because remember, sharp up equals sharp down and the Fed is going up very sharp. That means that somewhere down this cycle, there’s a sharp down as well.
The other thing is, the Fed might go up this far—you see my hand—and I might only come down half of that. But what happens is that the mortgage market guesses. So at some point, the mortgage market will drop a fair bit, let’s call it 18 months from now, and I’ll refinance then. I’ll just keep waiting for it to drop to a certain point and refinance.
If after that it goes back up, I don’t care. I’ve locked in my rate once. There just has to be one single day 18 months from now where the rates are low and I’m just waiting there. I call my banker and I say lock my rate in and then I’m done.
Toby: It’s like the gym, short term pain equals long term gain.
Neal: There is no long term gain without the short term pain. That’s what the Fed is saying. You want to keep having these gains without any pain, that doesn’t work. That’s steroids. You know what’s going to happen with steroids.
Toby: You’re going to get puffy.
Neal: There you go.
Toby: It’s going to hurt you. So we’re going to save you from yourself, economy. We’re going to save you from yourself.
Neal: Listen, I got to tell you this, the Fed catches a lot of flack because we’re all like, this is some evil organization. If you didn’t have the Fed, you’d have housing bubbles every three years exploding and prices falling to half.
Toby: You would have funds figured out that it only goes up and say, we’re just going to buy everything because in 10 years, it’s going to be astronomical anyway. They would somehow justify it and they would just […].
Neal: Somehow justify it and then everybody would be bait paying 20%, 40%, or more.
Toby: Then we’re Europe. Then we are going to be a nation of renters.
Neal: Yes. And by the way, you might worry about this. Only one Fed in the world now has pricing power left to be actually able to do this. The Europeans haven’t raised interest rates in nine years, even though they’ve got bubbles forming of their own. Look at the London housing market. You would think that the US would be really, really cheap if you went to London.
If you went to Singapore, you’d think that London was cheap. I mean, the housing markets outside the US are ridiculously crazy expensive, because their Federal Reserves have lost the ability to raise interest rates. So thank God that our Fed can slow our markets down and cool them off. It’s good.
Toby: Short term pain, again, just keep repeating it. It’s short term. I agree with you. I look at all the amounts of equity, I think the average equity in a home in the United States is still over $200,000. The credit scores have never been higher on purchases. We don’t have all these adjustable rate mortgages flowing all over the place.
This is not 2008, and people that want to make that comparison just don’t understand. There are 5 trillion reasons why it’s not the same. But even if you remove those, this is the Fed. I don’t necessarily like all the underwriting restrictions and how hard they are. But in situations like this, I’m glad.
Neal: I like them. If you don’t have these restrictions, you end up back in 2007. I’m glad that the Fed has these restrictions in place.
Toby: One of these things is not like the other. This little hiccup is not 2008.
Neal: Right.
Toby: I agree with you 100%.
Neal: One data point I want to offer and then this is the last one. I’ll shut up after that. But if you are going to go back and look at the past, which is a good thing, we encourage you to do that. Why only look at 2007? Why don’t you look at 1991, 2001, look at the ’80s? Look at those recessions. Look at how housing did in those recessions and look at how rents did in those recessions.
The problem is that 2007 is the anomaly. You’re basing all of your investment decisions on the only real estate anomaly of the last 100 years. That doesn’t make any sense, right? Look at all of them. Look at all of them and you’ll have a much better picture of what happens when an economy goes into a recession. You have nine different sets of data.
Toby: I’ve always compared. One of my favorite things is to compare the median home price to the median rental price. You’re looking at what’s the approximate rent value of a unit price. If it gets too out of whack, and it was getting close before the Fed started taking action.
Neal: It was getting close.
Toby: But when the price is no longer, hey, I can’t afford to stay in this place, I need to rent it. It can’t support the debt and can’t support the valuation, you’re toast. I think that’s to me—because living in Vegas, people were buying houses for $1 million that you would rent for $2000. It was a $300,000 property or $200,000 property. That was not a $1 million property. I wish the rents would never support that valuation.
People got kicked and just got crushed as a result. We weren’t there. We still have rents going up. They’re keeping pace for the most part with the values. There was a period of time when the value started to run away a little bit. Not anymore. The rents are still going up. That’s because demand is so high right now. Again, I feel bad for the poor. I feel bad for people that are kind of moderate income, people that are just starting out in the workforce because it’s going to be tough for them to buy a property.
Neal: It could be, but you’re an investor. You’re listening because you’re an investor. So if there’s one data point that you should study, it’s what happened in 1982 when the Feds raised interest rates to 18.5%, right? What happened to the housing market then? Most people don’t understand this.
The short answer is the housing market went down for four months, 7% down. Some markets went down 10%. Then they went back up and they ended the 1982 recession higher than the beginning of the recession at 18.5%. Yesterday’s interest rates were 5.53%.
Toby: You always look at growth and inflation and inflation isn’t going away. So if you’re betting on inflation, they’re going to curb it, but it still goes up every year. They’re basically telling you the value of your asset, whatever you buy, is going to go up no matter what.
Neal: Absolutely. It’s not even really in their control. I think inflation in the future, Toby, is more in the 3% range. I think we had this amazing 2% timeframe that has ended, it may not come back for decades. If inflation is going to be 3% a year, I want to buy every fixed asset there is to buy.
Toby: You got it. Everything’s on sale right now and we should be on it. I think of it that way, within reason. But you’re still looking at it going, this is a great time. If everybody thinks this is a bad time to be buying, this is a great time to be frugal about your buying, but it’s still a great time to be buying. You’re getting short term pain, long term gain. If you’re willing to do it, to purchase something and stick it out next year. What do you think? Do you think it’ll be early 2023 when it comes back or do you think we’re looking farther out?
Neal: I think it’s a little bit farther out because everything is delayed. If you think about it, we’ve been threatening to raise prices or raise interest rates now for seven months, but today’s market prices haven’t gone down. So there’s a delayed effect. Well, it’s also going to be delayed on the other side when you come out. So it’s the second half of 2023.
I think we see some seriously good interest rates, maybe by August or September of next year, but we might see some pocket opportunities before that, where interest rates go down a little bit and we have some opportunities to refinance. The only message is this: liquidity, liquidity, liquidity. You don’t know what’s going to happen in the next six or seven months. You don’t know how bad it’s going to get—over liquidate.
If you normally have $100,000 in liquidity in your property, have $200,000, have $250,000. Even have access to more if you need. That liquidity is extraordinarily cheap compared to the benefit you’re going to get on the other end.
Toby: Don’t look at it in a period of months, look at it in a period of years. No matter how you slice it. It may be later in 2023. I can’t see us out in a year down. I still think in terms of just about every other situation where the S&P got crushed in the beginning of the year, almost always, not always, but almost always bounces back up within two years. I don’t think there is a situation for me.
Neal: It’s rare. 2008, again, the aberration but otherwise, it’s extremely, extremely rare, right? So you’ll come back down. Just remember this, the United States is the only cheap real estate market in the developed world. There is no other cheap developed in the world market in terms of real estate. And cheap is always relative because there are only so many dollars worldwide and we happen to be the reserve currency of the world, so everybody wants to buy our stuff.
The fact that we are the cheapest, cheaper than anywhere in Europe. Third world countries and Europe are more expensive as a percentage of people’s incomes than we are. India—I came from India—is 2–3x more expensive as a percentage of salaries than the US is. Maybe closer to 3x than 2x. China’s horrendously expensive. This is the only cheap real estate market in the world. It can’t stay that way.
Toby: Yeah. Cheap being relative to how much money you make right now.
Neal: Being relative, yes.
Toby: But once you realize that you live in that opportunity, take advantage of it.
Neal: The institutional investors certainly are. So if you look at institutional portfolios in 2005, 5% of their portfolio was real estate. Today, it’s 25% and they’ve already made announcements that they’re going to 40% by 2030. So we’re halfway through that process.
Toby: I don’t blame them. I don’t blame them. Neal, I really appreciate it. How does somebody get a hold of you?
Neal: Well, luckily, I’m the only Neal Bawa on the world wide web. So simply type in Neal Bawa, hit enter, and you’ll see plenty. You’ll see plenty.
Toby: I really appreciate you coming on and sharing with us. I think you and I and a lot of other investors are in agreement. Maybe people could stop listening to all the hate, all the anger, and all the doomsday out there and actually look at the opportunities that this presents.
Neal: Awesome. Thanks for having me on, Toby.
Toby: You got it.
